By Howard Fischer
Twitter: @azcapmedia

PHOENIX — The attorney for an anti-tax group told a judge Friday that Arizonans have no legal right to second-guess the decision by state lawmakers to cut taxes for the state’s most wealthy.

Kory Langhofer, attorney for the Free Enterprise Club, did not dispute the Arizona Constitution does permit people to seek a public vote on things the legislature enacted. All they need to do is get the signatures equal to 5% of those who voted in the last election to put a legislative enactment on hold until voters get a chance at the next general election to ratify or reject the changes.

He told Maricopa County Superior Court Judge Katherine Cooper, however, that right does not apply to anything that affects state revenues. And that, he argued, is the case here.

But Andy Gaona, representing Invest in Arizona, the group that gathered the signatures to force a public vote, said that ignores a crucial point.

Gaona said it would be one thing if the petition drive was trying to stop the state from raising the money it needs to function.

“We don’t want to impair or impede the operations or functioning of government, which makes sense when you think about why you would not want to withhold the general appropriations bill, for example,” he said. “Government would literally cease to a halt if the general appropriations bill were to be halted.”

But that, Gaona said, is not what this petition drive seeks to refer to voters.

“No matter how you cut this cookie, this measure will slash taxes, particularly for the highest income earners in our state,” he pointed out to Cooper.

And by a lot: Legislative budget staffers calculate the tax-cut plan, approved earlier this year by the Republican-controlled legislature, would reduce state revenues by $1.9 billion a year by the time it is fully implemented in 2025. That compares with a current state budget of $12.9 billion.

It would do that by scrapping the current system where tax rates are based on net taxable income.

For individuals earning up to $26,500 and a year and couples earning $53,000, that rate is 2.59%, There are several interim steps before the tax tables top off at 4.5% for individual earnings of more than $159,000; double that for married couples.
Senate Bill 1828 collapsed that into a flat 2.5% rate.

“There is no serious dispute that SB 1828 going into effect and these rates applying will cause an immediate and dramatic revenue reduction for the state’s general fund,” Gaona said. And that, he told Cooper, undermines any claim that holding up SB 1828 until November 2022, when voters would get their say, would in any way harm state government.

Langhofer, however, said it isn’t that simple. He said there are multiple variables that have to be considered to determine whether a change in the tax laws — even one that decreases the rates — will have a long-term effect on state revenues.

“If you raise taxes too much, people will work less,” Langhofer said. Even the differences between the tax rates here and elsewhere, he said, affect the economy, and by extension, state tax revenues.

“We all know people who’ve moved here from California partly for taxes,” Langhofer said. So he said Cooper is not free to determine that a referendum on the tax cuts won’t ultimately affect state operations.

But Cooper, for her part, said there’s a more fundamental question of whether she has the right to tell voters that they don’t have the right to review — and, if appropriate, repeal — what the legislature enacted.

She said the Arizona Constitution does give the legislature the power to enact laws.

“But the people preserve the power to propose laws and amendments to the constitution, and to enact or reject the same at polls, independently of the legislature,” the judge said, quoting from the constitution. “And it also reserves for use, at their own option, the power to approve or reject at the polls, any act or section, or part of any act of the legislature.”

Cooper said she’s willing to accept, for discussion purposes, Langhofer’s contention that there is no way of knowing on a long-term basis whether a tax cut will help or hurt the state’s financial bottom line.

“Aren’t we then supposed to err on the side of a broader construction of the referendum power and not the exception?” she asked.

“I don’t think so, your honor,” Langhofer responded.
The public debate over SB 1828 goes beyond just the fact it would cut $1.9 billion in revenues at a time that some people argue the state is not properly funding public schools and other basic needs.

There’s also the question of who gets the relief.

Gov. Doug Ducey has repeatedly sought to portray the measure as providing a tax cut of about $300 a year for the “average Arizonan.” But the details paint a different picture.

An analysis of the tax cut by legislative budget staffers put the savings for someone making between $35,000 and $50,000 a year at $11. That increases to $96 for those in the $50,000 to $75,000 taxable income range.

Bigger benefits kick in at higher income levels.

Taxpayers with income of between $250,000 and $500,000 would see an average $3,071 reduction in what they owe each year, according to the staff analysis. That increases to more than $7,300 annually for those earning from $500,000 to $1 million.

Even if Cooper decides the referendum drive is constitutional, that doesn’t guarantee the tax cut will be placed on hold until at least November 2022. The Free Enterprise Club already has filed a second lawsuit contending many of the 215,787 signatures turned in are not valid.

Among the allegations is that some paid circulators had not registered with the secretary of state or that they collected signatures before registering. There also are claims that some registration forms are missing required information like providing a full address.

Any of those would disqualify all the signatures they collected, possibly leaving the petition drive short of the 118,823 valid signatures necessary to force a public vote.

Other claims include issues of handwriting irregularities and missing dates or addresses of those who have signed the petitions.
Cooper is not likely to consider those issues until she rules on the legality of the referendum and there is a chance for whoever loses to seek Supreme Court review.

The Free Enterprise Club also had challenged a second referendum, this one imposing a cap on tax rates for those earning more than $250,000 a year as individuals and $500,000 for couples. That was designed as a work-around for the most wealthy from the effects of Proposition 208, a 2000 ballot measure which sought to impose a 3.5% surcharge on incomes above that level to fund public education.

But the secretary of state’s office reported Friday that measure failed to get enough signatures.

It probably did not matter, however, as the Arizona Supreme Court earlier this year effectively voided Proposition 208.